The Market’s David and Goliath Saga

The trading war between retail traders and hedge funds has taken over Wall Street and is receiving intensive media focus. It has taken over the radio waves, newspapers and even the more modern mode of communication… the internet. Here is our take.

My partners and I have been trading collectively for over 120 years, either from the trading floor of the NY Commodity Exchanges, to running money off the floor for one of the largest hedge funds, or from our trading room in Santa Fe, NM - and we have experienced it all, firsthand.

We successfully played the commodities explosion in the 1970’s from the trading floor, including when the Hunt Brothers almost cornered the silver market. We profitably traded events like the crash of 1987, the financial crisis of 2008-2009 and most recently the meltdown in 2020 as many subscribers recently experienced.

This firsthand real-world experience has helped us develop trading systems, which center around highly disciplined risk management and a process that works no matter what the prevailing winds of the market will deliver.

The new twist creating the current market insanity is evolving much quicker and spreading further than past bubbles, and it demands proper trade management more than ever, to avoid getting caught up in the game and getting destroyed.

The Robinhood traders

The “little investor”, through public stock forums (Reddit) and executing on platforms that did not even exist a few years ago (Robinhood), decided that they could take advantage of an anomaly that they cleverly identified. They attacked the float of fallen companies that were suffering from inherent business interruption from COVID, or older businesses operating on outdate business models, whose investment models are no longer rewarded in our “new economy.”

Last week started off with news that these stocks were climbing in an astronomical fashion and these almost dead businesses began a resurgence unlike any we have seen.  You could not escape the news as all of media were covering this phenomenon.

This is what one refers to as a short squeeze, and these small investors had ganged up to “squeeze” the short sellers who were for the most part, large hedge funds that take advantage of businesses whose stocks are on the decline.

It has cost several hedge funds many billions in losses as they were forced to “cover” their shorts at astronomical prices.  One or more of these large hedge funds had to be bailed out by other hedge funds. It really was the story of David taking on Goliath. The small investor won out, for now.

The traditional long/short hedge fund plays that have dominated markets will be changed forever with the rise and power of small retail traders banding together.

Although the retail investor began to emerge as a force to be reckoned with in April 2020, as the institutional investors suffered from post-pandemic-swoon traumatic stress, this new fervor by the small retail investors (David) should continue to play out.

The latest short squeezes

From GameStop, to AMC, to Tootsie Roll Company, the squeezes keep coming.

The newest squeeze brings even a newer twist to the story. Silver, through First Majestic (AG), soared by nearly 100% since last Thursday. Silver futures rose by nearly 12% before retreating early Monday by 5%. The reason for the retreat in both AG and SLV is even more interesting. Apparently, the Reddit crowd (now over 7 million strong) stated that they were not calling for a buy in the silver futures as they know Citadel (Goliath) owns it.

Whether they meant to buy or not, the fundamentals in silver are sound. Both for its industrial use anticipating that the economy will grow alongside rising manufacturing demand, and for a potential reflation trade. We still anticipate that commodity prices will soar if industrial supply remains limited while consumer demand increases.

Bio

Michele 'Mish' Schneider currently serves as Director of Trading Research and Education at MarketGauge.com. She writes and produces daily market analysis in "Mish's Daily", and serves as a developer and trading mentor in several of our trading services, drawing on her 30+ Years of Trading and Teaching Experience.

Mish is a former floor trader on several New York Commodity Exchanges, including Coffee, Sugar and Cocoa NYMEX and FINEX in NYC. While on the trading floor Mish also served as a market analyst for two of the largest commodity trading firms at the time - Continental Grain, and Conti-Commodities.

Mish also wrote the best-selling finance book, Plant Your Money Tree; A Guide To Growing Your Wealth.